Extend 'Payday Loan' Protections to All Borrowers

We owe a lot to the brave men and women who choose to serve in our country's armed forces. Now I'm hoping that one recent measure passed specifically to assist military personnel will serve as a template for all consumers.

The 2007 defense authorization bill includes a provision capping annual interest rates on consumer credit loans, including "payday loans," to service members and their dependents at 36 percent.

What's a payday loan? If you don't know, consider yourself fortunate. Payday loans are small, short-term, high-interest-rate loans, typically of a few hundred dollars. They go by a variety of other names: cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

Under a payday loan, borrowers promise to repay the debt out of their next paycheck, usually in two weeks. They typically write a post-dated personal check payable to the lender for the amount borrowed, plus the loan fee, or authorize the lender to withdraw the funds electronically. If a borrower cannot repay on time, he is allowed to roll over the loan for additional fees.

Fees charged for payday loans are usually a percentage of the face value of the loan, starting at about $15 for every $100 lent. On an annualized basis, the fee charged on these loans can top out at 400 to 1,000 percent, according to Travis Plunkett, legislative director for the Consumer Federation of America.

The payday loan industry has been accused of targeting the military and causing many members of the armed forces to fall into a downward spiral of debt. It's a claim the industry rejects, arguing that military personnel account for only 1.3 percent of revenue across the industry.

However, a study released by the Defense Department found that military personnel are three times as likely to use payday loans as civilians. Such loans can be particularly problematic and career-ending for military personnel because a poor financial record can result in the loss of a security clearance or even a court-martial.

Understandably, at a time when we are at war, this measure is important for members of our armed forces, who should not be worrying about personal debts spinning out of control. But I don't understand why civilian consumers don't deserve the same protection. If payday loans are a bad deal for the military, they are a bad deal for everyone.

To get a payday loan, you have to have a bank account. You have to give the lender permission to cash a post-dated check or electronically take the funds out of your account. That means you are giving a creditor direct control over your cash. That is never a good thing.

"It's just wrong to charge 400 percent, no matter how severe the need is," Plunkett said. "These loans are inherently abusive, whether they are directed at members of the military or the general public."

Plunkett said that what's good about this legislation is that interest is defined to include all extra charges and fees, including the sale of related products, such as credit insurance.

The measure prohibits lenders from making loans to service members based on checks written without adequate funds in the bank. It would also bar lenders from arranging loans that give them priority to electronically access a service member's bank account or paycheck. Finally, the provision would ban loans secured by a service member's vehicle. That type of loan is called a title loan.